- Management is already trying to ease investors' concerns with relation to the dividend.
- Ford's dividend has always been cut when US auto sales slid.
- Ford will continue to face heavy competition in the self-driving space. Competitors have far stronger balance sheets.
Management's comments from Ford's (NYSE:F) analyst day last week definitely gave food for thought for shareholders and potential investors alike. Although the company's financial and auto arms are expected to grow in the next few years, electrification and mobility investments are likely to weigh on the bottom line going forward. We can see this in projected earnings from analysts. In fact, the worry now is that 2016 could end up being a top in the market for the auto manufacturer in terms of operating income and free cash flow. Currently, Ford's operating income on a 12 month average basis is $10.06 billion and its free cash flow is $13.51 billion.
However, Ford knows the industry is moving towards electrified and self-driving vehicles so it has to adapt. Ford definitely seems to have a head start with regards to the autonomous area where it may have first movers advantage. The company is on record as saying that it will be selling over 100,000 units a year to fleet customers within 5 years. No other company has made such a bold statement. Now the question that remains is whether Ford can deliver. The jury is still out in my opinion.
Management Is Already Addressing Concern Over The Dividend
For dividend investors, the worst thing that can happen is to be sitting on an investment that could end up heavily underwater for years. The cracks are already appearing. Ford's CFO has this to say about the dividend last week:
We expect Ford's performance to be strong through 2018 -- with our core business improving, allowing us to invest in the emerging opportunities that will ensure our future success. Our capital allocation continues to be disciplined and to deliver strong returns, and we are fully prepared for a downturn. As a result, we plan to offer a secure regular dividend through the business cycle with an option for upside on investments to keep our core business strong and to win in emerging opportunities.
The Auto Industry Is Highly Cyclical
On the surface, investing in Ford for the dividend looks seriously attractive (almost a 5% yield). The quarterly payout has tripled from $0.05 to $0.15 since 2012 plus the company started paying a special dividend ( an extra $0.25 in January). However, new investors looking to invest in Ford for income should be wary of the highly cyclical nature of this industry. Free cash flow can turn on a dime when auto sales fall as illustrated in the chart below. The red circles illustrate when Ford's dividend was cut, which seem to coincide with auto sales declines.
Ford Has Always Cut Its Dividend In The Wake Of Falling US Auto Sales
Therefore the worry now is that whether auto sales in the US have peaked? If August's numbers are anything to go by, they definitely have in my opinion. Deliveries fell by well over 4% in August despite extra sweeteners evident in the market. The Seasonal Annual adjusted sales rate or (SARS) dropped to 17 million which is well below the almost 18 million we saw in July. Light truck sales which were the "go to" machine for US customers over the past few years dropped 6% in August. This is worrying even if Ford tries to pass it off as temporary due to its aluminium trucks being available shortly.
Tech Companies Will Continue To Compete In The Autonomous Cars Area
The autonomous area is key and Ford knows it. The CEO Mark Field stated that there were still four hurdles before autonomous cars became mid stream within 6 to 8 years. Technology, economic, regulatory and adoption were the four hurdles he sighted but he definitely focused in on technology as he knows this is where the greatest risk lies. Silicon valley companies have sprouted up as being the main competitor to traditional auto companies like Ford in this space. However, the likes of Ford and General Motors (NYSE:GM) seem to be leading in this space and will get to market first cars. However, Ford's balance sheet is sure to take a beating.
Can Ford's Balance Sheet Withstand Strong Tech Competition ?
With a present debt to equity ratio of 3.05 (compared to 0.54 for Apple (NSDQ:AAPL) for example), you would wonder how long Ford can keep this project going and compete strongly. I say this because if Ford is going to beat tech companies in this space, it is going to need scale fast. Why? Because costs at the outset will be very high which will adversely affect margins. Ford will need for its autonomous cars to be adopted quickly once launched. If not, companies with better balance sheets will be able to invest more for longer which will invariably result in better cars down the line.
To sum up, I still maintain investing in Ford for it dividend presents risk. The CFO has already publicly backed the dividend which is already a sign of weakness. US auto sales seem to have topped which will deter operating income and cash flows. Furthermore, Ford finds itself in a cycle of heavy investment (mobility, autonomous & electrification) which will keep margins suppressed. Don't be sidetracked by the huge yield on offer here.
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